FRASER INSTITUTE – Federal budget punts major policy decisions to another day

By CHARLES LAMMAN
and JASON CLEMENSThe Fraser Institute

THE FEDERAL BUDGET adds fuel to the growing problem of policy uncertainty hovering over the Canadian economy. It’s essentially status quo. It fails to chart a clear course for taxpayers, entrepreneurs and businesses, and risks making Canada even less competitive.

Put simply, the government has punted major policy decisions into the future, causing further uncertainty about the economic environment in Canada. Without a clearly expressed policy vision, entrepreneurs and business investors will likely continue to sit on the sidelines, or worse, take their investment elsewhere.

The backdrop heading into the budget was not favourable. Canada’s economy faces significant challenges, not least of which are the emerging policy reforms coming south of the border. The Trump administration and Congress are in the process of putting forth policy changes that could decidedly hurt Canada’s economic interests (border tax, renegotiation of NAFTA, buy American policies, etc.).

Instead of a wait-and-see budget, the government could have been proactive and taken steps to carve out a clear economic agenda

They are also negotiating reforms to the U.S. tax system that could make our southern neighbour much more attractive for investment and skilled workers. Since the U.S. is one of our key competitors for investment and top talent, this could spell trouble for Canada’s ability to retain and attract investment and skilled workers.

This challenge to Canada’s economic competitiveness comes at a time when business investment in Canada is already slumping. Business investment (non-residential) has fallen in eight of the last nine quarters, decreasing by more than one-fifth over that period. This should be cause for alarm for a government committed to encouraging innovation and economic growth since investment is a key engine powering both.

In the face of slumping business investment and a potential major improvement in U.S. economic competitiveness, the federal government has chosen to maintain the status quo, sitting on its hands and seeing how things develop in the United States. This leaves taxpayers, investors and entrepreneurs guessing what Canada’s economic policies will be.

For instance, the more than $140 billion projected run up in debt will leave businesses and households uncertain about future tax hikes, and that uncertainty impedes investment and entrepreneurship today. This means many important decisions are likely being postponed.

Another key area of uncertainty is the timeline for ending deficit spending. Recall the Trudeau government campaigned on running deficits of no more than $10 billion with a return to a balanced budget in three years. Since coming into power, annual deficits have almost tripled.

This year’s budget projects a $28.5 billion deficit for 2017/18. What’s more, it provides no concrete plan to end deficit spending and return to balance. In fact, the federal government is on track to run deficits indefinitely to 2050, according to a recent department of finance report.

Again, Canadians are left wondering by this budget how much in taxes they will pay both this year and in the future – impeding investment and entrepreneurship.

Further uncertainty about taxes stems from the federal government’s review of the tax code. The budget revealed initial results of this review, which includes new revenues (nearly $5 billion over five years) from closing tax loopholes, “cracking down” on tax planning activities, and eliminating tax credits.

This means Canadians will pay more taxes as a result of this review. A much better option would have used the extra revenue to cut tax rates broadly – something that would actually foster economic growth.

The budget provides no clarity about whether the review, which is ongoing, will result in some of the rumoured tax hikes that swirled before the budget. For instance, it does nothing to quell fears among entrepreneurs and investors about rumours of a planned capital gains tax hike, giving the impression that this economically damaging tax increase is still on the table. Already, the rumours of a tax increase on capital gains had some investors cashing out or looking for complex workarounds instead of searching for investment opportunities that could create jobs and help the economy grow.

This budget just punts the decision to a later, unconfirmed time.

And keep in mind, several tax hikes that pre-date the budget are still on the table and will continue to harm Canada’s economic prospects including a higher personal income tax rate on Canada’s most skilled worker, a forthcoming payroll tax hike, and a federally-mandated carbon tax.

Instead of a wait-and-see budget, the government could have been proactive and taken steps to carve out a clear economic agenda including a plan to balance the budget, rein in debt, and improve Canada’s tax competitiveness. This would have helped encourage investment and address the challenges emerging from the U.S.

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